HR3959-119

What This Bill Does

This bill responds to the Securities and Exchange Commission's treatment of Rule 15c2-11 in fixed-income markets. The findings say Rule 15c2-11 was historically understood as an OTC equity-market disclosure rule, that fixed-income markets operate differently, and that applying the rule to Rule 144A fixed-income securities would change long-standing requirements without a separate rulemaking or cost-benefit analysis. The operative section then provides that 17 C.F.R. 240.15c2-11 does not apply to quotations of fixed-income securities.

The bill defines fixed-income security broadly to include notes, bonds, debentures, certificates of deposit for a security, certificates of deposit, asset-backed securities, other evidence of indebtedness, and convertible debt instruments or securities with warrants or subscription rights. The effect is to keep broker-dealers from having to satisfy Rule 15c2-11 quotation requirements when publishing quotations for debt securities, including Rule 144A debt sold to qualified institutional buyers.

Who Benefits and How

Fixed-income broker-dealers benefit because they no longer need to apply Rule 15c2-11 review and information requirements to bond and debt quotation activity. Rule 144A debt issuers benefit because their securities can continue trading in institutional markets without additional quotation-related compliance barriers. Qualified institutional buyer bond investors benefit from market liquidity if broker-dealers keep quoting fixed-income securities. Private companies issuing debt securities benefit from reduced risk that secondary-market quotation restrictions increase borrowing costs.

Who Bears the Burden and How

Securities and Exchange Commission staff lose authority to apply Rule 15c2-11 to fixed-income quotations. Investor protection advocates bear a transparency burden if some fixed-income securities trade with less quotation-linked information review. Compliance officers at broker-dealers still need to distinguish covered fixed-income quotations from OTC equity quotations. OTC equity-market participants do not receive the exemption and remain under the existing quotation rule.

Key Provisions

• Provides that SEC Rule 15c2-11 does not apply to quotations of fixed-income securities.
• Provides a fixed-income security definition covering notes, bonds, debentures, certificates of deposit, asset-backed securities, and other indebtedness.
• Provides coverage for convertible debt and debt securities carrying warrants or subscription rights.
• Uses findings to distinguish fixed-income markets from OTC equity markets and Rule 144A information practices.